Tuesday, January 31, 2012

European Policy By Sloth

Team Macro Man apologise for the lack of service recently. Last week saw their technical pullback first get Apple'd and then FED'd. And though there were glimmers of the technical turn, it looks as though it has morphed into a "technical pause". Despite the fizzling out of yesterday's Euro summit there has been little sell-off which leaves TMM thinking that there is a chance of the European "Policy by Sloth" may work.

TMM wrote back in December about what they believed the necessary conditions were to bring about an end to the crisis. The classic Anglo-Saxon view (TMM cannot resist the French line) is that the only way out of the crisis is fiscal union. But TMM believe it is far more nuanced than that - strictly, that measures that confirm the path to some sort of fiscal union in the medium term are in place. Specifically, as we wrote back in December, TMM reckon we need to see the following:

(i) A large enough amount of cash to cover Spain & Italy's financing needs for the next two years,
(ii) Incentives to longer term investors to buy Eurozone government bonds,
(iii) Structural reform measures aimed at rebalancing within the Eurozone and, lastly,
(iv) Clarity on the growth outlook.

In TMM's view, clarity on the first three of these conditions is enough of a firewall for the rest of the world to chug along, and the last of these would be enough to unwind at least some of the under-performance of European assets and loosen financial conditions significantly.

TMM also highlighted the Silver Bullet Fallacy: there rarely exist simple solutions to solve complex problems. The alphabet soup thrown by US policymakers at the the 2008/9 GFC is point in case. What is more important for markets, is to be able to see the exit. And, as many have noted over the past couple of years, the exit can only come with growth, and that is why the last of the above conditions is arguably the most important.

The Street was generally surprised at how strong the take-up at the December 3yr LTRO was, and this morning's FT report that several banks are likely to double or triple their request for 3yr money at February's LTRO seems to slot nicely in the framework of providing adequate liquidity both for the banking system and Spain & Italy in particular - conditions (i) above. Putting this in the context of the EFSF and ESM and the seeming probability that the March summit will confirm ESM and EFSF to run alongside and the numbers have begun to add up. It is only the end of January, yet Spain has already funded about a fifth of its 2012 funding needs. The expanded collateral pool similarly means that French banks will be able to fund a large amount of their balance sheets with the ECB, incidentally, reducing the power that the Germans have over France going forward. The private sector money that would have funded these banks but has now been crowded out will have to go somewhere.

The second point, of providing incentives to longer term investors to buy Eurozone government bonds is not there yet. The treatment of the ECB in the Greek PSI is particularly important here, to avoid markets confirming the suspicions they already have regarding de facto subordination. While the ECB's LTRO provides time, and the promises of "No More Greeces" with respect to the approach to PSI which is supposed to be "over" evokes the post-Lehman policymaker consensus, only actions (in the form of ECB participation, or an explicit lack of PSI in the upcoming second Portuguese EU/IMF programme) will convince longer term investors.

The Fiscal Compact, while rightly criticised as being too centred on austerity, is a structural reform (iii). Additionally, the measures in Greece and Italy in particular will raise medium/long-term potential growth and aid rebalancing. More needs to be delivered here, but each incremental measure will help. By far the most important, in TMM's view, is the enactment of structural debt brakes in national legislation, to cement the credibilty of fiscal restraint in the future. In particular, TMM would regard the French enactment of this as the most important structural measure that lays the groundwork for future fiscal union. Of course, Sarkozy has delayed this until after the April election and, with the Socialist Francois Hollande ahead in the polls stating that he would renegotiate the fiscal pact such that France would not cede sovereignty, this is a significant hurdle for markets. TMM cannot get BOLIVIAN bullish until this is passed, but it does seem like much of the plan is coming together.

Finally, the growth outlook (iv). Markets are discounting machines, and they have already discounted fiscal austerity in Europe. The PMIs have begun to move higher which shows the exit... Greenshoots 2.0, the fabled second derivative. Late last year, the Squid published an excellent piece of research comparing Asia in 1998 with the current situation. TMM found particularly interesting the conclusions they came to, which were that market underestimated significantly the degree of demand weakness in those countries at the epicentre (ASEAN). However, the market also significantly overestimated the impact of the crisis upon the rest of the world, resulting in a grab for risk assets in late 1998 and especially in 1999. This is all of a sudden seeming all too familiar... the economic performance in the Euro-periphery has continued to disappoint, while that in Germany & France, the US and increasingly the rest of the World has exceeded expectations.

To sum up, while TMM expect the new month to bring a new bear attack on Portugal, they fear that they have been too cautious on the risk front. The strength in US equities, despite a relatively tepid earnings season, speaks volumes. And if the liquidity emitted from the upcoming 3yr LTRO is indeed large enough to restart animal spirits, then it is not hard to imagine equities finishing the year a lot higher.

TMM will finish by noting that GDP fell in most countries in 2009, yet equity markets and risk assets in general put in an incredible performance. It is not about what is happening *now*, it is about where markets can see we are going. And it increasingly looks like they can see the exit. TMM think that while just about anything US cycle linked looks cheap (Spoos, Korea, SGD, TWD, you name it) there are some things that have run on just about nothing - spec longs in AUD being case in point. TMM wouldn't advocate going BOLIVIAN but we think the equity perma-bears are in for a rough couple of months.

Wednesday, January 25, 2012

Non-Predictions for 2012 -Random

But first the markets - Someone threw an Apple into the works last night that delayed  our expected roll over, but it looks as though it is underway and having had that failed test higher we are more confident of our call. As for Apple (So THAT's where all the QE ended up)  TMM are still amazed at the awe within which its results are held. Imagine the outcry if that was a bank, BP or your local utility company -  Vince Cable and his baying mob would explode in a cloud of hyperbole.

But as nothing else has changed. We are still pretty bored but will fill in with some more non-predictions for 2012 . Here are the random ones

Ed Miliband will NOT be leader of the UK Labour party by the end of the year. A rollover bet. the theme of him being pretty useless has not changed but Blair's changes to leader selection during his term has made it pretty hard to push incumbents but we think the pressure will increase for him to go.. Interestingly it was the BBC and Guardian who were the ones earlier this week shouting most about the increasing Tory lead. TMM might be over suspicious but perhaps they are embarking upon a push for change.

And talking  of the BBC, they will NOT stop linking any injustice anywhere in the world to UK Government spending cuts and they will NOT stop generalising anyone working in a bank as evil but will manage NOT to generalise all journalists as phone tapping, family destroying, moral bankrupts.

Consultants will NOT find life easy. Shareholder backlash to senior management pay will NOT leave middle management untouched. A  crackdown in inefficiency will lead to more focus on the production of the final product and less spent on the luxuries of  "corporate awareness" and all the associated "consultants". And as for financial Head Hunters ..

However IT and HR departments will NOT lose any of the control they have over the business lines they are meant to serve. Their cancer is too far progressed to cure.

Obama will NOT lose the US elections. Whilst massive amounts of airtime are being poured into the upcoming US elections TMM really aren't that bothered. OK, if the Republicans get in they will most probably tighten fiscal policy and so growth would be lower but with Romney's tax rate at 15% and Gingrich's general divisiveness we think it very unlikely that either make it the whole way. In general TMM feel that politicians globally are losing their grip as opinion formers and are having to scrabble more and more to catch up with populous opinions forming and swelling through social media rather than main stream press. Whoever gets in as US president will be subject to the same under-pressures and unlikely to be able to drive their own agendas much further than out of the garage.

The Olympics in London will NOT be the disaster many expect yet during them manned flight to Mars will NOT be harder than getting to Canary Wharf. However the Olympic tradition of the host nation losing money on the whole event will NOT be broken.

Greece will NOT stop taking the piss with pricing in tourist restaurants. As shown by their inability to change their macro economy there is little chance of micro Greek economic theory changing.

Kate Middleton, Duchess of Cambridge will NOT announce that she is expecting a baby. Sentiment indices are far too high on this.

The Mayan predicated end of the world will NOT occur in 2012. - TMM are offering believers immediate delivery of ayuverdic tea and Himalayan pink salt lamps against Dec 22nd  delivery of all their worldly goods (excepting their tea, lamps, wind chimes, tin foil beanies and Peruvian woolly hats)

Tuesday, January 24, 2012

Technical Turn Tuesday

We have that nagging gut feeling again. Ok, the data continues its trend of "better than expected" surprises with the Euro PMIs but there are factors appearing that leave our post of yesterday of a generalist "it drifts higher" ramble in need of a tweak. Our concerns aren't linked to news flow or the usual developments in Greece, Iran or whatever bad twist the blogosphere has dug up about imminent disaster (we see Barclays has started looking at Skyscraper building as the next portent of doom, especially for China), but the butterflies we feel in the stomach are as follows:

1) The last few days have seen a rush of more spivvy "get me in" euphoria. Nice start to our bigger-bullish view, but nothing goes in a straight line and this phase may be over.

2) The technicals. Soothsayer signals (see glossary) abound with turn signals in the Dow, EuroStoxx and various European index components (DAX, MIB, CAC) and noticeably in a raft of AUD crosses with their normal equity correlations. The shape of most risk asset climbs have been getting thinner in sharp wedge like manners. Dojis spotted?

3) Recent highs in many equity indices means stops have been driven. Leading back to point 1).

4) It's Tuesday. We like Tuesdays for turns. As the run has been up then the turn should be down.

5) Momentum change leads to model driven accounts changing direction and we still think that January has seen the models dominate market moves more than usual as "real" players have mostly sat on their hands and core beliefs unless been forced otherwise. Spivs excepted.

Now the above are hardly Macro and it's not easy when the Heart says buy yet the Gut says sell, but the above are worrying enough to make us want to get out of shorter term longs and take a breather. So despite us remaining general bulls we are going to tune positions and prepare for a shorter term down swing to allow us to re-accumulate longs before (we hope) resuming the grind higher.

Monday, January 23, 2012

Can you feel it?

TMM have been away last week skiing in the Italian Alps. Wow, what a surprise re prices! A coffee up the mountain is cheaper than in a provincial UK town. Yes, cheaper. The snow was great, the sun was shining, the resort was pretty, deserted and delightful, the locals were friendly and accomodating leaving us feeling that it's time to leave the French and Swiss mega-resorts to the Russians. Austria, however, will always have a place in our hearts due to its apres-ski madness. (By the way, US readers, which is the best US resort for apres-Ski? We have struggled to find any in the few resorts we have tried)

Returning to the markets, the last week hasn't really seen any game changing news, just the continued ingress of "better than expected" data dripping on to the fire of bearishness. It appears to be working in extinguishing some of the flames and we have returned to find some of our favorite permabears now wondering what new news they are missing to explain prices being higher. We'd like to suggest,- "What you were missing in the first place". Prices don't have to keep falling on old news. Change is what counts and the change is in the background data vs expectations.

In the immortal words of the Jackson Five -

If you look around
The whole world's coming together now
Can you feel it, can you feel it, can you feel it? (da daa daa dada)

Well maybe the whole world isn't coming together quite like that but the bears are finding it hard to extract value out of their well chewed bear food, unlike the bulls who, as ruminants, find it easier to extract value from regurgitated low quality good news.

Our problem is that we are find it pretty difficult to get excited by anything at the moment. Our long term views remain intact ( as per our slowly apperaing non-predictions for 2012) but short term influences still leave us pretty unexcited. So we are happy to play the upward drift of all things risk, hopefully accelerating thru old highs, until the next tape bomb. But to be honest immunity to tape bombs feels pretty high and it will have to be something pretty nuclear to knock things lower again.

So we hope the "risk on" grind will continue, even if it is doing more damage to some of our hedges than Edward Scissor-Hands on speed.

Knowing what to write apart from "s'goin up innit" is pretty hard, so we'll leave it at that.

Thursday, January 19, 2012

Non-Predictions 2012 - Commodities

TMM note that with the rapidly changing policy mix in Europe from “suicidal” to “Die Hard”, making calls on commodities is first and foremost a question of how much QE there is: if the deflationary environment and crisis risk is kept at bay in Europe it isn’t as if things are going to be peachy in Europe but risk assets will run, not least of all because last time we saw this much of a policy response from November 2008 to March 2009 commodities ripped.

Now, TMM would note that if the US continues to recover with Europe at least stabilized and housing in particular continues to recover we could get to year end and be talking *gasp* rate rises and not just fiscal drag which just might turn the USD from a legally acceptable form of toilet paper to legally acceptable tender. So folks lets be honest: there’s commodity fundamentals and then there’s central banks that can do a lot to make fundamentals not matter in the slightest. So with that caveat (“all non predictions subject to global M3”) we present our Commodity Non-Predictions:

1) Platinum will NOT under-perform Silver.

TMM have covered platinum before – the macro context of the world’s largest producer here and the threat of electric vehicles to Platinum Group Metals seems to be handily suppressed which can mean only one thing – cost push inflation plus a demand recovery = this should go up. Now TMM can’t rule out Eurostupidity so we are going to offset this with Silver which is sitting at ~300%+ of cash costs unlike Platinum which is only about 50% above cash costs and which as previously discussed seems oversupplied if one discounts the tinfoil beanie brigade. Oh, and it’s a really pretty chart from the long term:

The shorter term:

And realises high teens vol versus the hi-ho silver 45% whipsaw show.

2) Copper Is NOT Going Anywhere.

TMM think that copper is in no man’s land. To wit:

  • expanding supply coming online end of 2012 and 2013 (-).
  • China committed to property controls (-).
  • While also loosening credit (+).
  • US building recovery being priced into equities (+).
  • But little follow through in OECD demand yet (-).

To that end we think copper is not going anywhere exciting this year, so buying OTM anything in copper seems rather unappealing to TMM.

3) Oil Vol Will NOT Disappoint.

TMM think Oil is the complete opposite of copper this year. In TMM's minds, there are three things that could happen this year, all of which mean Oil will move a lot:

  • Iran blows up, Oil goes to $150, global growth collapses.
  • ECB-driven reflation, more growth, demand sends Brent back to $120+.
  • ECB-driven deflation, double dip, $90 oil.

To that end while crude vols have ticket up somewhat they still look appealing at ~23% to TMM, right in the historical complacency zone.

And with that, TMM will try and motivate themselves to come up with some Equities & FX Non-Predictions.

Monday, January 16, 2012

TMM Asks You: The Future of Employment

Where are the jobs going to come from? TMM aren't sure Rifkin's idea of a new mittelstand of craftspeople makes sense particularly, but then they have to come from somewhere - the secular decline of jobs in Race Against the Machine makes it seem pretty dire for a lot of jobs and we aren't just talking bond traders and FX dealers. Jobs where you can collect a steady and consistent rent for doing the same thing are on the outer it seems: 

For instance, creative writing, arts instruction, and other “soft skills” are not always as amenable to rule-based software or distance learning. We concur with Rhode Island School of Design president John Maeda’s vision that a move from STEM (Science, Technology, Engineering, and Mathematics) to STEAM (adding Arts to the mix) is the right vision for boosting innovation. The technology and systems for education have to be compatible with that vision. In particular, softer skills like leadership, team building, and creativity will be increasingly important. They are the areas least likely to be automated and most in demand in a dynamic, entrepreneurial economy. Conversely, college graduates who seek the traditional type of job, where someone else tells them what to do each day, will find themselves increasingly in competition with machines, which excel at following detailed instructions." - Race Against the Machine 

This is a great idea but would kill a lot of sacred cows - like company specific defined benefit pensions and the home mortgage subsidy. TMM like this idea a lot, but getting it done won't be easy and in the interim people can fall through cracks. It also runs counter to the life of anyone except an itinerant investor / hacker / engineer who lives out of a messenger bag with a laptop. So..... if it seems a stretch to us its a BIG stretch for everyone else. 

Decouple benefits from jobs to increase flexibility and dynamism. Tying health care and other mandated benefits to jobs makes it harder for people to move to new jobs or to quit and start new businesses. For instance, many a potential entrepreneur has been blocked by the need to maintain health insurance. Denmark and the Netherlands have led the way here. - Race Against the Machine 
Eliminate or reduce the massive home mortgage subsidy. This costs over $130 billion per year, which would do much more for growth if allocated to research or education. While home ownership has many laudable benefits, it likely reduces labor mobility and economic flexibility, which conflicts with the economy’s increased need for flexibility. - Race Against the Machine 
TMM are coming to the conclusion that the stable outcome here is centralized savings like Australian superannuation, portable healthcare and insurance policies and a fairly healthy degree of redistribution and consumption / sin taxes, much along the lines of Rick Bookstaber here and here. Quoting some of Bookstaber's piece below, just what do you invest in when the world is like this?

Take these two trends (Diminishing Consumption, Diminishing Labor in Production) to their extreme. We are in the year 2025. Because of advances in production technology, much of the path from extracting the required renewable resources through to the production and distribution of most of the items we demand can be accomplished with automated methods overseen by a small cadre of engineers.... The main items we demand, beyond food, clothing and shelter, are the nth generation game systems.... The entertainment industry has disappeared; it is all free, operated with the same open-source ethos that spelled doom for most commercial software enterprises over the past decade. Which also means no more advertising. We pretty much know what we want to buy, and depend on those in our FriendWeb™ (version 4.6) to guide us....If you look hour by hour at what anyone is doing, it is hard to differentiate the super rich from those a few rungs above subsistence level....If you look hour by hour at what anyone is doing, it is hard to differentiate the super rich from those a few rungs above subsistence level....
Perhaps more importantly from a fundamental economic perspective, what does this mean for the Phillips Curve? If labor drops out of COGS or becomes ~5% or less and/or has no pricing power then does the Phillips Curve become a random scatterplot as wages are no longer a key driver of inflation? What does this mean for monetary policy? Is loose policy just about redistribution from fixed to inflation linked receivers and "financial suppression" with ~0 redistribution to those who derive most income from wages? Is Ron Paul vs Paul Krugman really just a pissing contest between two guys on different sides of a vanilla rate swap? TMM don't have the answer but would be fascinated to know what you think.

Friday, January 13, 2012

The Book of Eurorevelation Part II

Chapter Seventeen verses 1-18

17:1 And there came France, one of the seven nations which had the seven debts, and talked with me, saying unto me, Come hither; I will shew unto thee the judgment of the great whore ratings agency that sitteth upon many waters:
17:2 With whom the banks of the earth have committed fornication, and the investors of the earth have been made drunk with the deals of its fornication.
17:3 So he carried me away in the spirit into the wilderness: and I saw it sit upon scarlet coloured bonds, full of names of blasphemy, having seven heads and ten horns.
17:4 And the agency was arrayed in purple and scarlet colour, and decked with gold and precious stones and pearls, having a golden cup in its hand full of abominations and filthy deals of its fornication:
17:6 And I saw it drunken with the blood of the indebted ones, and with the blood of the martyrs of the Euro: and when I saw it, I wondered with great admiration.
17:7 And France said unto me, Wherefore didst thou marvel? I will tell thee the mystery of the agency, and of the bonds it rides upon, which hath the seven heads and ten horns.
17:8 The bonds that thou sawest were, and were not; and shall ascend out of the bottomless pit, and go into perdition: and they that dwell on the earth shall wonder, whose names were not written in the book of issuance from the foundation of the Euro, when they behold the bonds that were, and are not, and yet are.
17:9 And here is the mind which hath wisdom. The seven heads are seven mountains of debt, on which the agency sitteth
17:10 And there are seven sovereigns: five are fallen, and one is, and the other is not yet come; and when he cometh, he must continue a short space.
17:11 And the bonds that were, and are not, even he is the eighth, and is of the seven, and goeth into perdition.
17:12 And the ten horns which thou sawest are ten nations, which have received no bailout as yet; but receive power as sovereigns with ratings from the agency.
17:13 These have one mind, and shall give their power and strength unto the bonds.
17:14 These shall make war with the IMF, and the IMF shall overcome them: for he is Lord of funds, and lender of lenders: and they that are with him are called, and chosen, and faithful.
17:15 And he saith unto me, The waters which thou sawest, where the agency sitteth, are peoples, and multitudes, and nations, and tongues.
17:16 And the ten horns which thou sawest upon the beast these shall hate the agency, and shall make it desolate and naked, and shall eat its flesh, and burn it with fire.
17:17 For the Euro hath put in their hearts to fulfil its will, and to agree, and give their kingdom unto the bonds, until the words of the Euro shall be fulfilled.
17:18 And the agency which thou sawest are those ratings, which reigneth over the sovereigns of the earth.

Blessed be the name of the Euro

2012 Non-Predictions - Rates

First, TMM must apologise for the lack of posts in recent days, a function of a lack of enthusiasm to start the new year coupled with significant head-scratching with respect to their 2012 Non-Predictions. As readers know, TMM don't do predictions, but they *do* try to make "Non-Predictions" however, this year they have found them particularly difficult to make given that the investment backdrop hinges almost entirely upon the European situation.

While intellectualising about what could happen, how it might play out, which politician will do what, which country might leave (if any) and the potential for a global depression is an exercise that all traders and investors must carry out, TMM believe that forming views and positions *only* as a function of such an analysis is misguided. The reason for this is that this catastrophic outcome is still a tail risk. It is a very large tail risk, and undoubtedly, would result in significant damage to asset prices and the social fabric within Europe. Having thought particularly hard about how policymakers might come to implement an exit of one or more countries from the Eurozone, TMM have come to the conclusion that it is just not possible to do without political, social & economic consequences that are both domestically and internationally unpalatable. There is no conceivable firewall to a country leaving the Euro that does not include troops at the border, capital controls across Europe and the closing of world financial markets. One nightmare TMM once had went along the lines of the following course of events:

Day 1: Financial markets sell off sharply, the NeuDrachma plummets 20% on world markets.

Day 2: Financial markets sell off sharply, the NeuDrachma plummets 25% on world markets.

Day 3: Rioting and food shortages in Greece. TV pictures across the world of Spanish, Italian, Portuguese and Irish citizens queuing outside banks and driving to the borders.

Day 4: Bank runs in foreign countries of EMU bank branches.

Day 5: Stock markets crash 15% in the absence of a policy response.

Day 6: Military coup in Greece.

Day 7: Italy and Spain announce they are closing their borders.

Day 8: After the weekend, stock markets fall another 20% as borders close and riots erupt across Europe.

Day 9: EM stock, bond & currency markets collapse as the Eastern European & Asian central banks confirm rumours that they have exhausted their FX reserves.

Day 10: Germany announces that it will not roll over ECB Target 2 balances with the Bundesbank.

Day 11: After yesterday's 40% fall in the Euro, World financial leaders meet and agree to shut markets for a week.

Day 12: Rioting erupts across the world as banks are shut and food shortages arise.

Day 13: Israel launches a pre-emptive strike on Iran.

Day 14: EU dissolves.

Policymakers are well aware of the consequences - TMM believe eventually the ECB will blink to prevent a country exit should the possibility of such an outcome materialise - but if one does occur, then the last thing TMM will be doing is attempting to trade Macro. They will be in those queues at banks and supermarkets. This reminds TMM of the 1983 film War Games... the only option is not to play. And like Mutually Assured Destruction, TMM strongly believe that markets will simply learn to live with the large tail risk, and the risk premia priced into various assets probably reflect this to some extent. That said, the usual trades like Schatz calls (which would likely be Deutschemark denominated), and EUR/DKK forwards/puts are certainly worth sticking in their books as tail hedges...

But TMM want to put the above behind them and move into 2012 on the assumption that the Euro continues to exist, and below present the first of their 2012 Non-Predictions... Rates:

1) 10yr Gilt yields will NOT finish 2012 below 3%.

As regular readers will know, TMM were wrong-footed by the Bank of England last year with respect to their (lack of) response to inflation surprises but more importantly to the lack of pass through to wages. However, TMM reckon the BoE have been very lucky in that the Eurozone shock has depressed activity and prevented rates markets from testing the BoE's credibility. Tesco's Christmas earnings shock notwithstanding, TMM remain of the view that the UK still has an inflation problem, and certainly relative to many parts of the developed world, it is the least likely to experience deflation (that particular baton is being passed from Japan to Europe).

Undoubtedly, in the face of the Eurozone crisis reducing the pool of available AAA assets (and ensuring the media is focused on economic woes, providing businesses with a convenient argument to resist wage demands), the front-loaded UK fiscal consolidation and continued Gilt purchases by the BoE have kept yields low. Indeed, over the past six months in particular - beginning when Italy came under market pressure - Gilt yields have fallen dramatically as foreign investors (in particular the Japanese) have switched out of core European bonds and into Gilts. Now, TMM completely appreciate that the reasons behind this all make a lot of sense. Having an independent currency and active central bank on the canvas of weak aggregate demand and large balance sheet adjustment is a significant advantage. Inflation risk is much easier for investors to understand than credit risk, especially when the latter is governed by the often arbitrary whims of politicians in a multitude of jurisdictions. That argument has clearly been won, and when compared to TMM's macro-based model of Gilt yields, appears responsible for something like 130bps in negative risk premium (see below chart). While any sort of rigorous estimate of this risk premium is inherently difficult to do, a back of the envelope comparison with French OAT spreads to EONIA (~125bps), a country with not massively different aggregate fiscal metrics to the UK, but which should reflect this risk premium would appear to be of similar magnitude.

TMM digress. In spite of all the above, we reckon that markets price significant risk premium in Gilts (and non-Eurozone DM bonds in general), and that the risk reward sits with expecting some decrease in this as Europe gets on with its structural reforms and drift towards fiscal union. Should this occur, TMM believe that markets will begin to test to the Bank of England at some point, and selling Gilts at 2% yield is just too juicy for us to resist.

2) 3yr CNY Shibor swaps will NOT close 2012 lower on the year.

TMM were heartened to see the China bull mafia come to grips with some of the issues China faces last year. While TMM doesn’t think China is universally a fraud, it has structural issues of which the largest is the implicit tax on savings and subsidy to capital expenditures via consistently negative real rates. 2011 was a watershed for China because it became abundantly clear to investors and some more outspoken policy officials that China had a serious over-investment problem that could not be justified by being a developing countries. Empty cities, ridiculous skyscrapers in the middle of nowhere, freshly built highways with no traffic – there was no shortage of stuff to point out indicating over-investment and it has been extensively here and elsewhere. This subsidy has led to really silly credit growth and inflation, as covered elsewhere and generally an asset bubble or two (see below chart of real rates, A Shares and Hong Kong property).

As China’s capital account has become more porous China’s inappropriate monetary policy has moved from strictly local stuff (stocks) to offshore stuff that Chinese people like to hoard as inflation hedges (silver - see below chart of Chinese net silver flows) or which are intermediate goods hoarded in supply channels like copper.

None of this is particularly new, however, but what *is* new are financial outflows from China, anecdotally related to wealthy Chinese people taking money offshore to invest in stuff with a real yield now that property measures are restricting them from hoarding apartments. TMM are reminded of Winston Churchill’s line about Americans…"Americans can always be counted on to do the right thing...after they have exhausted all other possibilities". And think it may equally well apply to Chinese central bankers. If China wants to reform incrementally without crashing the bus for every property developer and steel mill then rates need to go up, but at a manageable pace. The solution to avoid widespread bankruptcies is to reduce the Reserve Ratio Requirement to free up lending, but similarly charge higher rates to ensure the weak get winnowed out and investment is disciplined. To keep CPI down, better deposit rates should pressure property and a steady rise in CNY with higher rates should reverse financial outflows and keep food price pressures at bay.

All of this requires higher long term SHIBOR expectations and to avoid a hard landing likely requires some credit & fiscal easing which we are already seeing. As such TMM, reckon SHIBOR and the Yuan move higher, while credit incrementally loosens and is supported by demand-stimulus from the fiscal coffers.

3) 5y5y forward UST will NOT finish the year below 4%.

TMM reckon that the past two years provide ample evidence to the resilience of the US economy which, in the face of a multitude of shocks - from the Arab Spring-driven oil shock to the Eurozone crisis - has manifestly refused to fall into recession. Indeed, the rebound in consumer confidence, credit aggregates and the consistent upside economic surprises have convinced TMM that the US has exit velocity. TMM's models reckon ISM is likely to move back towards 55 over the coming months, and this will likely solicit upgrades to GDP forecasts over the coming year which, according to TMM's analysis (see chart below) are largely a lagged-function of the current ISM print.

With a ZIRP policy from the Fed, traditional links between growth expectations and real rates in recent years have broken down to some extent, with longer dated forwards now exhibiting a high degree of co-movement with near-term GDP expectations. The usual theories of "New Normal", Fed activism and Financial Repression can certainly explain a structural lowering of real rates post-crisis (t least in the near term) and, like in Non-Prediction #1 above, there has been an additional premium priced in reflecting "Europe" risk. It now seems that rather than pricing long-run growth expectations, longer-dated forwards are more strongly a function of short term growth prospects (see below chart).

While TMM are certainly sympathetic to all of the above, the evidence in the US is that while the recovery has been slow to get going (as a result of multiple shocks), it seems to be picking up steam. The recent noise about Fed QE3 in MBS should only serve to raise both long-term real rates and inflation break-evens as easier policy spurs future growth. Simply put, at 3%, USTs arguably price a Japanese-scenario to a significant degree: back of the envelope, 5y5y JGBs are 1.6%, while the years of the "Bond Conundrum" (2004-2007, arguably a conservative upside estimate) had the 5y5y UST at an average of about 4.75% (i.e. - something like long run expectations of about 2% inflation plus 2.75% real growth), implying a 52% probability of being in the Japanese state. In TMM's view, the pendulum has swung too far toward the deflationistas in this respect and reckon paying this part of the bond market in the context of very large CTA & Real Money longs is not a bad punt.

4) The RBA will NOT cut more than 25bps and the Cash Rate will also NOT finish 2012 below its current level of 4.25%.

TMM recognise that this is a very punchy Non-Prediction given both market pricing of just shy of about 100bps of cuts over the year, and also for (probably) trying to be too clever for our own good in expecting the RBA to hike rates later this year should it cut them to 4% earlier on. But we thought, "what the heck", it wouldn't be the first time we've been wrong on a punchy call. TMM digress... 2011 saw a very large rally in the front-end of Australia as expectations of multiple RBA rate hikes reversed with the risk aversion of the summer into a cutting cycle. As far as TMM can tell, much of this move was driven by tail-risk hedgers looking to protect themselves against a global recession and deepening of the Eurocrisis. The trouble is, that the Aussie front end now prices the bulk of such an event, and without multiple RBA cuts, there is a lot of risk premia to be taken out.

TMM believe that the stickiness of the curve is related to the very bad experience many punters had here in August, when 10 sigma moves were seen alongside a complete evaporation of liquidity in the bill future market. Scars take a long time to heal, and TMM share those scars. But looking at the fundamentals, inflation is not showing any signs of collapsing (see below chart) and the turn in the policy cycle in China, coupled with an accelerating US argue that pricing in global recession is just wrong.

And TMM's forward-looking Taylor-type rule (see chart below) reckons that - even assuming global growth does not rebound from current levels implied by PMIs (something TMM believe is an overly pessimistic position) - that even though near term the base effect-driven slowdown in inflation might argue for a modest easing to 4%, that by the end of the year, policy will need be tightened once more. Of course, this will not do wonders for domestic demand and is something TMM will look at once more when they come onto their Equity Non-Predictions. But in the meantime, they are dipping their toes back into shorts in the Aussie front-end.

TMM will now get back to their homework and try and come up with some more Non-Predictions. In the meantime, we wish our readers a good weekend.

Tuesday, January 10, 2012

Ten All New Management Terms for 2012

Ten All New Management Terms for 2012

First, it was good to see the Belgian CB data supporting our views on the Dexia unwind being the cause of the spike in the ECB MLF in mid December. Though we remain on the bullish side of the fence in general, we continue to struggle with 2012 non-predictions (it's worse than homework) so we will be taking another day off from commenting on markets that are in general (apart from eur/sek) going where we want them too.

Following our critical view of what we saw as the worst management terms of 2011, we were delighted by the general response and to find such common concern over the diabolical increase in management jargon. But why, if we know it is so dreadful, do we let it persist? We have decided that it's most definately a power game - an arms race. The holders of the newest and most convoluted terms deemed to be the more superior.

As programs to eradicate plague pests, such as the Tetse fly, involve introducing sterile bred alternatives into the system to compete, so TMM are releasing their own batch of genetically modified 2012 Management Terms into the vocabulary. Hopefully, if adopted widely enough , they will help to show how silly most existing terms are, leading to their demise. We give you -

1) "Omegal" - from the Greek letter Omega, the last letter in their alphabet. Can be used negatively "Jeff, ok, nice idea - but pretty omegal" as in "the last thing we would do". Or positively , "Ok folks, lets omegalise this thing" - Finalise or close the matter.

2) "Charge the trees" - Eco-reference together with moving forward rapidly. Bound to work. Suggested uses - "Hey we aren't going to charge the trees on that one" - "Are you suggesting we charge the trees?" - "He's the type of guy who'd charge the trees" Do feel free to make up any conotation you like whether it is references to Rhino's charging against trees to shake down ideas or to billing folks who really deserve a free service due to the morality of their work.

3) "Diodal" - Once you head off in a direction there is no turning back. "You realise that this is diodal ? You with me?" "Market research has suggested that diodal uptake is presumptuous upon addiction".

4) "Deep Sea Ten" - "I want you all to go Deep Sea Ten on this" or "Scott, 11th floor said "deep sea ten" this by Friday". Basically an idea or thought process that only the "Deep Sea Ten" global rescue vehicle from a 1960s puppet show could pull off. Of course there never really was a "Deep Sea Ten" but as proven by people who use the malapropism "no holes barred" few people challenge the origin of phrases anyway.

5) "Superstring" - Knowing the liking for misappropriating complex science into management sound bites, this one is off to a head start. It evokes joining more things together than anyone else has with normal strings. Very de-rigour in sales, management , system analysis, social networking, the lot. This one should easily catch on. "We are superstringing the network to optimise conjacent synergies". "This will superstring all your strengths and client needs". "Multidimensionalising superstrings is only one of the many applications that we can run on Data-Yuanque CRMs. "

6) "Euronation" - To have your top idea go so wrong even the ECB, IMF and world superpowers are incapable of rescuing it. "The sales budgets for 2012 are looking subject to euronation in the current time frame". Also see "euronate" - To cause cataclysmic failure . "Guys we need to euronate on XYZ's competitive offering".

7) "Lolhor" - Low on Left, High on Right. Every presentation always has to have as many of these graphs as possible. What is the use of a graph showing achievement, targets or dreams if it doesn't start "low on the left" and go "high on the right" ? "Jess, I've got some investors coming in in 30 mins could you run me off some Lolhor charts for them please?" ( Tip - If you are struggling, use cumulative returns). Of course costs should be Hollor, but psychologically no one likes a graph that goes to zero as once there, where's your job?

8) "Three Buck Whistle" - Many management terms are derived from sporting, military, parliamentary , or transport terms where the original meaning has been lost in time. "The whole nine yards" is a classic example where there is no agreed source. We suggest that "three buck whistle" could be launched on similar lines. It will never be agreed as to whether it is derived from the length of steamboat's hoot, a referee's whistle, a musician's tin whistle, or the volume of a workman's wolf-whistle (none, of course, as we just made it up) but we suggest it could easily slip into management parlance. "The Board gave that idea the three buck whistle" - "It wasn't worth a three buck whistle" - "this deal is THE three buck whistle .. {pause for effect}"

9) "Weidmann" - The opposite of reaching out. Not giving a damn and doing what you wanted to all along. "We have weidmanned the stakeholder community and pressed ahead with our original intentions". "Hi Greg, I'd just like to weidmann you on the proposal you sent over". "You wanted it in green? Can we remind you of the weidmann clause (page 87)? You are getting it in red". {Any references to current leaders of the Bundesbank are entirely intentional}

10) "Yaldistic" - Insert it as an adjective in front of a noun of importance and see if anyone ever challenges it. If they do, explain that it is a reference to a school of thought developed by Marshall and Petigrew in 1955 which has recently been further developed by the Yalding School of Management to describe a product of bandwidth ideation through out-reach. However as the latter terms have recently been discredited with the arrival of the YSM Grand Unification of Management Phraseology hypothesis. "Yaldism, yaldistic, yaldistically" are now preferred.

Please feel free to start using any of the above, see how many you can use without challenge (we would guess most) and report back as soon as you spot any of them roaming free in the wild. As ever the comments column is there for your own suggestions. Remember- "Make it up, make it work" (there's another one).

Friday, January 06, 2012

Been there, done that, do it again?

We have been somewhat tied up with start of year work things, but are trying to put together our non-predictions for 2012, which isn't easy. We are sure we are not alone in finding that it is well-nigh impossible to come up with 2012 trade ideas without acknowledging the world is pretty binary due to European dynamics. Anyone who can't see that is probably wearing these (this picture taken this very morning by a friend of TMM at Xiamen airport in China):

Helen Keller sunglasses? ARE YOU SERIOUS? At some point, Chinese third string brands need to give up on trying to export and learn to use spell-check, and at least wiki some of their brand names. If they'd read this, it may have saved some ensuing embarrassment. Or at least get some decent advertising folks because this is so bad it's, err,... really bad. If this is the future of Chinese consumer brands, TMM think the better trades in the China consumer sector are food (NOT milk powder) and WPP.

Now back to markets - In our eyes we are in phase one of the WWF (Wrong Way First) move for the year. We went into this last year with paragraphs that are as apt now as they were then.

"Now of course we have the normal year-change housekeeping. It's that time of year that really highlights the flaws in the "efficient market hypothesis", as prices are about to start to move as everyone writes, reads and establishes their favourite trades for 2011, despite the information they are based on having been around for some time. It's those pesky benchmarks again. If you are personally judged Jan 1st - Dec 31st then your behaviour will treat those dates as important watersheds. (original here)"


"this time of year is full of trading peculiarities, as themes and trades for the year are discussed and executed, alongside the micro news-following tunings. As a result, we usually end up with a "wrong way first" move turning around the start of the third week. With the US on holiday for Martin Luther King day next Monday, TMM think this is lining itself up as a suitable turn date to target. We have always had a background belief that US holidays make good general turn dates. But if we are looking for turns against consensus we need to have a think about what that consensus is. Europe - As far as we can make out the trade coming out of December was to position for another major attack on Europe kicking off in January. (original here)"

Sound familiar?

So far this week has been "silly week" in our eyes, volumes have been micro in many markets and the ease on the roads into London this week are testament to folks not having fully returned after the Christmas holidays. A classic time to chase stops and test extremes.

The hole left by a lack of directly Euro negative news has been filled with the wedding of Hungary, Italian debt refunding needs, UniCredit performance and ... errr .. anything that fits. Hungary is wobbly, but though some may think it is the first candidate to rejoin the Warsaw Pact, this morning's statements of intent appear to have calmed things a bit, EURHUF looks like a short term top at least (fatal last words), so though this may just be a correction in the bigger HUF theme, we expect it to slip from the top of the worry list. The European Debt refunding story is interestingly presented - always the amount of new issuance and no regard to all that money being returned. So where is a large chunk of that refinancing money coming from? Well there is and will be, a lot of money sloshing around looking for a home.

One thing doing the rounds this morning is the bull/bear indicator with its recent high being highlighted as a potential turn signal. We last saw one this high in Dec 2010, but even then the next 2 months saw some pretty sizable rallies. Of course if you are bullish and you have little risk on, you are likely to buy; if you are bullish and have a lot of risk on, then you won't; so the starting point matters, especially in EM. Another key issue may be what the redemptions will be like at Real Money funds this month, and especially EM funds. The instructions to redeem or subscribe tend to occur in January after the investor letters go out. Following two consecutive quarters of cross-border repatriation flows only seen before in 2008, it looks as though they are prepared for similar this month with relatively large cash balances in hand (TMM have heard whispers of 7% cash). If the redemptions don't come, then our friend the benchmark is going to induce some rushed buying.

Finally we would like to thank all our readers for their support to our Xmas Charity appeal this year. A stunning effort from you all that has impressed the charity involved. We will be downgrading the appeal to the background and removing the widget, but a link will remain just in case.

We wish you all the best with your lottery ticket for today's NFP draw as we carry on dragging entrails from rabbits trying to predict 2012.

Wednesday, January 04, 2012

Mark to Market - 2011 Edition

Well, another year is upon us and TMM are back in the saddle. We cannot say that we bid farewell to 2011 with nostalgia, a year whose effort/reward ratio was very high for TMM. And while quite a few of our macro calls went wrong, in the event, managing to catch a few big market turns helped rescue our years, leaving us sitting in modestly up for the year and above the average performance of the Macro peers. While nothing to shout about, TMM will take that as a win, giving the drubbing taken by global asset markets & hedge funds in general.

Now, time to mark TMM's 2011 Non-Predictions...

First, Commodities:

1. Iron ore will NOT be trading higher on Dec 31st than it is on Jan 1st.

HIT. Both equities involved in the space and physical traded off heavily. A Chinese tightening cycle plus capped upside on supply kept iron under pressure for most of the year and it collapsed with all things risk in August & September as Chinese property measures began to bite and steel traders were caught long inventory.

2. Rare earth metals will NOT come down to earth anytime soon and Tungsten won’t either.

HIT. TMM count this as a win, but it would have been a much bigger win in July. Rare earth export restrictions have been weakening, though spot Neodymium & Dysprosium are still up big on the year. Fundamental scarcity now has to be weighed against substitutes like induction motors replacing direct drive.

3. Copper is NOT Coming Down Anytime Soon.

MISS. TMM did cut their copper position in February, but feel it is appropriate to judge by the letter of their Non-Prediction rules, and will thus mark this as a MISS. A structurally very tight market that loosens 5% can fall a long way very fast, much as did other top metals picks of January 2011, including Platinum & Palladium.

4. WTI NOT going to be under $100 for Long.

HIT. WTI had a huge run into the Arab Spring, collapsed but finished the year handsomely up. Tough trading, but for strong of stomach and margin this one paid. As of today, it feels like groundhog day in the Middle East and in crude.

So TMM score 3/4 in their Commodities Non-Predictions.

Moving onto Equities:

5. SPX will NOT trade below 1150.

MISS. While this Non-Prediction looked good for the first half of the year, the debt ceiling shenanigans & US double dip scare (for the second year running) sent the S&P500 to an intraday low of 1076.8 in early October.

6. The DAX will NOT outperform the IBEX.

HIT. A trade that worked well for TMM early in year, with the DAX underperforming the IBEX by 11% in Q1, before further oscillations & consolidation throughout the year.

7. Emerging Markets (MSCI EM) will NOT Outperform Developed Markets.

HIT. A deteriorating growth/inflation mix - particularly in Asia - combined with spiking risk aversion in the Summer led EM equities to underperform their DM counterparts by a whooping 20%.Which give TMM a respectable 2/3 in their Equities Non-Predictions.

Next, Rates:

8. The Bank of England will NOT continue to ignore upside inflation surprises.

MISS. TMM have already issued a mea culpa here.

9. 10yr US Treasuries will NOT beach their 2010 yield lows, but will also NOT rise above 4%.

MISS. While the latter part of this Non-Prediction proved correct, as with 5), the debt ceiling drama torpedoed this one.

10. Spanish 10yr yields will NOT hold below their 2010 highs, but Spain will NOT need a bailout.

HIT. The meltdown in BTPs in mid/late-July dragged SGB yields higher and through their late-2010 highs, but Spain's consistent implementation of its fiscal plan (the "shock" announcement that the 2011 deficit will be worse than expected looks a bit like a new government "kitchen sinking" the bad news to TMM), banking system clean up and attention focused elsewhere (i.e. upon Italy), and the SMP buying have all meant that a formal bailout has not yet been requested.

Disappointingly, TMM only managed to get one of their Rates Non-Predictions right.On to FX:

18. USDJPY will NOT be easy.

HIT. Of all TMM's Non-Predictions, this was the "most" correct, screwing all and sundry who tried to go long or short constantly, ending up effectively trading pretty flat and effectively trading places with EUR/CHF in the volatility league. USDJPY was NOT easy at all.

19. The Equity/DXY correlation will NOT break down, meaning that the DXY will NOT finish the year higher than it entered it.

MISS. While the S&P 500 and the DXY correlation remained strong, with both essentially finishing flat on the year after swings in both directions, the late sell-off in the DXY in the final days of 2010 and late rally in those of 2011 conspired to push the DXY up just shy of 2% on the year. As with 3), while this Non-Prediction was broadly correct, TMM will mark it down as a technical MISS, in accordance with the rules.

20. EURCHF will NOT close the year below 1.30.

MISS. Well... what can we say...? We suppose at least we weren't the biggest losers from this one... TMM wonder whether the Hildebrands end up in jail.

21. Voldemort will NOT stop taking the piss.

HIT. While the Yuan has appreciated this year, it was still in the managed fashion and China continues to run a gigantic Current Account surplus. Additionally, Voldemort continued to push around the EUR/USD FX market, defining ranges and frustrating most macro punters. Some things never change.

And finally, onto their random Non-Predictions:

11. The UK's Alternative Vote referendum will NOT pass, but the coalition will NOT break-up before the end of 2011.

HIT. The UK electorate overwhelmingly voted for simplicity and seemed uninterested in constitutional tweaking while the economic environment has been so bleak. The Liberal Democrat polling numbers coupled with the Cameroon desire to balance the right wing of the Tory party have indeed held the coalition together.

12. Ed Miliband will NOT be leader of the UK Labour Party by end-2011.

MISS. While Ed Miliband's polling figures and general performance continued to be horrific, despite the context of a weak economic environment, and with even Labour supporters rather unimpressed, the lack of suitable alternatives and an easy mechanism for unseating Miliband the Younger have left him intact. TMM remain resolute in their belief, however, that he will NOT be UK Prime Minister (the time horizon of this particular Non-Prediction precludes its inclusion in TMM's soon-to-be-announced 2012 Non-Predictions).

13. Belgium will NOT break-up by end-2011.

HIT. One of the "popular" topics to discuss as we entered 2011, and despite Belgium's political situation deteriorating as several attempts to form a government failed, this never really became a "market issue", and in the end, a government was formed.

14. Darth Weber will NOT replace Baron Von Trichet as the new ECB President.

HIT. The dark lord Weber and his apprentice Darth Stark both threw hissy fits and resigned from the ECB, protesting its purchases of peripheral government bonds as risking the stability of the Euro. TMM think it is pretty ironic that the consensus (ex-Germany) is that doing precisely this is the only way to prevent the Euro breaking up.

15. At least 1 member of TMM will NOT have the same employer by year end.

MISS. The musical chairs in 2011 consisted primarily of chairs being removed with people sitting on them as both banks & funds reduced headcount. TMM thankfully are still in their seats.

16. The UK 2011 X-Factor winner will NOT make UK No. 1 for Christmas.

HIT. To TMM's delight, the Military Wives beat Simon Cowell's latest to the No. 1 spot in the UK Christmas chart.

17. Australia's cricket team is NOT.

HIT. 'Nuff said.

Giving TMM, on random matters, a score of 5/7.

So, the final scorecard gives TMM 13 out of 21. For market-only related Non-Predictions they managed 8 out of 12, which is down slightly on last year's 6 out of 8, partially offset by TMM proffering a larger number of Non-Predictions on quite a few outsider bets.TMM are busy compiling their 2012 Non-Predictions and hope to present these over the coming days. In the meantime, we wish all our readers a very happy and profitable 2012.